ASSURANCE – 10 tips to prepare for a cost effective audit
Most private companies with external stakeholders having a significant financial interest (ie. loan or investment) will require the investee to prepare and report on audited or reviewed annual financial statements. This is an additional administrative cost which affects a company’s cash outflows and profitability if the company is not well prepared.
Based on our experience, we have discovered that these compliance related costs can be dramatically reduced if the reporting company is well prepared. We would like to share with you our top “10 tips” in surviving a successful and cost effective audit or review of your annual financial statements:
1 – Hire proficient and knowledgeable accounting personnel/department
- Although this tip may seem obvious, it is important to highlight that an ineffective and poor accountant will drive audit fees much higher. Having professional accountants with a recognized accounting designation, or extensive relevant experience is crucial.
2 – Engage the appropriate CPA firm
- Ensure the appointed auditing firm has the relevant experience in the industry and the business, and in auditing private companies of similar size and is upfront and transparent with the fees.
3 – Active communication with the auditor
- From the initial stages of preparing for the audit, up until the meeting with the board of directors, the controller/CFO should have extensive and active discussions/meetings with the auditors. Discussing the chosen audit approach, audit plan, assisting the auditors in understanding the control environment, business processes, business risks, etc. The audit should be a collaborative effort. This tip is imperative in achieving a successful audit.
4 – Preparation is done throughout the year
- As this can be a repetitive engagement, your experience from prior years’ audits is helpful in the preparation of the current year’s audit. Last year’s auditor may have offered insightful recommendations to improve internal controls, business procedures or other areas. These and other recommendations should be implemented once they are known. Appropriate schedules of accounts, monthly reconciliations and variance analyses on various accounts and other monitoring control procedures done on a regular basis throughout the year will reduce your time at year-end for preparing the audit file, and will also reduce the risk of errors. Strong internal controls reduce risk of errors and reduce audit procedures, consequently reducing audit fees!
5 – Complex and unusual transactions
- Involving the auditors during the year for consultation on the accounting treatment of complex or unusual transactions is strongly recommended. For example, transactions such as business acquisitions, discontinued operations, or others, maybe unusual and highly significant. Involving the auditors at the time of transaction will reduce time and year-end surprises.
6 – Quick response
- Delay in responding to the auditors’ requests will prolong the audit and undoubtedly increase audit fees. Answering quickly and having documents readily available will promote an efficient cost effective audit.
7 – Perform a self-audit
- By performing a self-audit before the auditors commence, will provide you an opportunity to correct some errors. Focus should be on high risk areas, high value balances. Using a sample basis technique will provide an objective approach in your self-audit. This way, you are confident that the auditors will have the best “product” to work with, audit procedures will be reduced, and will lead to lower fees.
8 – Prepare an annual summary
- In a memo format, presenting the auditor an annual summary of all the significant and new events occurred during the year, milestones achieved, changes in personnel or corporate structure, variance analyses on revenues, expenses, assets and liabilities with explanations, and a list of areas needed for improvement, will assist the auditor in effectively planning and executing the audit.
9 – Your auditor is a partner
- In order to get the most out of your audit, treating your auditor as a partner is a must. Take the opportunity to discuss various issues or concerns other than the audit, such as for example, tax compliance, business strategy, performance measurement, etc. Your auditor chosen should have diverse expertise or a resource network that can help you with these issues. An effective audit should conclude with an added value.
10 – Think long term
- Probably the costliest business decision that will surely result in high audit fees is the frequent change in auditors. Choosing the right auditor should not solely be based on fees. As a private company, your auditor should be a trusted business adviser. Investing the time to select an audit firm that “fits” with the company will not only help in reducing audit fees in the long term but can result in increased operating efficiency, improvement of the bottom line with the reduction of costs.
The primary objective of the audit is to comply with the various stakeholder’s requirements. Following the above tips, however, will not only reduce your audit costs, but should ultimately provide you with an opportunity to ameliorate your financial reporting process, internal controls environment and finally improve your business performance and your bottom line.
At MLSG, LLP, our audits are always results driven.